Opinions & Ideas

Over the last few days, four different Irish economists have been offering their thoughts on the Irish budget, due to take place in October. Some are more realistic than others.……………………………………………………………………………………………………………..IGNORE THE IMF ADVICE?WHAT ABOUT THE PRIMARY DEFICIT?WOULD AUSTERITY REALLY BE EASIER DURING A BOOM?ECONOMICS SHOULD BE GROUNDED IN REALITY, INCLUDING POLITICAL REALITY…………………………………………………………………………………………………………….

DAVID MCWILLIAMS

David McWilliams in the “Sunday Business Post”, who has, in the past, favoured Ireland leaving the euro , urged the Irish Government, in preparing the 2014 budget, to ignore the advice of the IMF, the EU, and the ECB, to complete the programme of budget consolidation it and its predecessor had agreed with them, and instead stimulate the economy. The IMF, the EU and the ECB are lending the Irish government money to keep services going, at rates of interest below market rates, so David’s advice is daring, to say the least. And Ireland still has a primary deficit, it is spending more on day to day spending than it collects in day to day revenue, even before it pays a cent of interest on past debts. David justifies his advice on the basis of the Household Budget Survey, which suggests that many Irish households are cutting back on spending, defaulting on rent payments, and drawing down savings to meet day to day expenses. A good part of the problem seems to arise, not just from debts, but from higher than expected bills, for which families had not adequately budgeted in advance, like university or school costs, or unexpectedly high utility bills.Of course, an easier budget would leave people able to spend a little more in the shops, and that would boost Government revenues. But a lot of any extra spending power, generated by a “stimulus” budget, would also go out of the country on imports. Another problem is credibility. If people believe the stimulus is only temporary, they may decide to save whatever extra they get, and not spend it. To the extent that that happens, there would be no stimulus to the economy, just an increase in the debts the taxpayer would eventually have to repay, assuming some was prepared to lend it to them.Then there is an even bigger question mark over David’s thesis. Where, and from whom, would the extra money he wants to spend, be borrowed ?

COLM MCCARTHY

As Colm McCarthy, in the “Sunday Independent”, points out, the government has been adding to the outstanding debt it owes at a rate of 1 billion euros per month throughout 2013.

He claims

“Government revenue is still, after tax increases and expenditure cuts, running way behind government spending and the state is continuing to overspend on a grand scale”

He adds

“It is bizarre that continued borrowing, which will add to the debt mountain, is routinely described as austerity”

Colm is also critical of the notion that, once Ireland is no longer borrowing new money from the IMF/EU/ECB troika (hopefully next year), it will somehow be in the clear, and restored to full fiscal sovereignty.

As he puts it, all that would then happen is that the discipline, required now by” official lenders” (who are under some sort of political pressure to keep the government going), will then be replaced by the discipline of “volunteer lenders”, who will be under no obligation to lend any money at all, to Ireland. These volunteer lenders would, he claims, be

“easily spooked by signs of consolidation fatigue and political irresolution in over-indebted countries”.

I believe they would also be easily spooked by the sort of advice offered by David McWilliams, because they would be afraid that, if it was followed, they simply might not get all their money back. And they have plenty of other places to lend it. As private institutions, they are not obliged to lend to any particular country.Furthermore, even when Ireland has exited the EU/IMF/ECB programme, it will still be required to abide by the disciplines of the EU Fiscal Compact, approved by the Irish people in a referendum, and by close EU supervision which will apply to all members of the euro zone.

It is important to remember that the banks, who would be lending to Ireland once it had exited the EU/IMF/ECB programme, would be lending money that ultimately belongs to pension funds, insurance companies, and savers , and they would have clear obligations to take every step to guarantee that they would get their clients money back, with interest.Colm also points out that Ireland has to make substantial repayment or roll over of existing debts, in particular years in the near future, for example, 12.7 billion euros in 2016, 19.6 billion in 2019, and 26.8 billion in 2020.

CONSTANTIN GURDGIEV

Constantin Gurdgiev in the “Sunday Times” analysed where the money Ireland is borrowing is going. He says“The two main current spending lines, social protection and health, are running at 65.2% of total voted current expenditure, up more than four percentage points since 2010”, when they were “only” 61% of all voted spending.In other words, these two departments are elbowing out the others. He adds that health, social protection, and education combined, absorb 90% of all tax receipts.He goes on to talk about the cuts that have been made so far.

He says

“Much of the current spending cuts hit temporary and contract staff, leaving permanent and more expensive staff protected.”

He says most the “savings “ in public sector pay, achieved by the Croke Park and Haddington road agreements with the public sector unions, are not sustainable, and will be reversed, when the latter agreement expires. In this sense, they do not represent a permanent structural reform.He advocates cuts in long term unemployment benefits, and the means testing of state pensions and of medical cards for the elderly.

KEVIN O ROURKE

Meanwhile, on the excellent “Irish Economy “ website, Kevin O Rourke, formerly Professor of Economics in Trinity College Dublin and now in Oxford University, writes about the effect of austerity, and the fact that austerity, by reducing spending, thereby reduces government revenue somewhat, and is, to that extent, self cancelling. He says“This does not mean that fiscal consolidation is never necessary, but the time for it, is when times are good, not when times are bad”

Well, who could really disagree with that?

It is sound economics…..but unlikely politics.When times are good, and revenues are nearly in surplus, it is, of course, theoretically easier to cut spending without real damage.

But in a democracy it is almost impossible, politically speaking, to do it, because voters, who might be losing some benefit, will point to the plentiful revenues, and say

“We do not need to do this, to meet some book keeping rule. We have the money, so we do not need to impose suffering on ourselves”

Politically, in my experience, it is actually MORE difficult to cut in a boom, than during a recession! In a recession, people will see the need for cuts. In a boom, they will not.The science of economics, divorced from the art of politics, is not all that useful!